Finances and the Newly-Married

Photo by Wes Battoclette

Let’s face it: discussing household finances is not fun, and can trip up the most stalwart marriages. Like everything else in life, open communication and transparency are keys to compatibility in any relationship, and marriage is no exception. This also includes how spouses view and handle finances. Whether the finances are co-mingled or maintained separately, keeping communication lines open early on in a relationship will help head off many problems and may just help keep the honeymoon last for years, rather than days.

Dean Johns of John D. Dovich & Associates, LLC, recently sat down for a chat with three young professionals, to get their perspective on some financial “do’s and don’ts” for the newly married. Joining Dean Johns in this discussion were Kurtis Polacek, CFP®, a financial planner at John D. Dovich & Associates, LLC; Whitney Maxson, Esq., of Katz Teller; and Lindsey Rauch, CPA of MCM CPAs & Advisors.

Dean Johns: Lindsey, I believe you are the newest “newlywed” in our panel, having been married less than one year. How did you tackle the subject of finances, and who’s going to pay for what within your new relationship?

Lindsey Rauch:We took a less traditional path to the altar in that my husband and I bought our house before we got married. Given my profession as a CPA, we agreed I would be the one to pay the bills and handle our finances. However, we do talk about everything in terms of how big purchases and other expenses fit into our budget. And yes, we do have a budget.

Kurtis Polacek:We lived in separate states before we were married, but returned to Cincinnati, got married and immediately purchased a home. We’re both heavily involved in our financial planning and handling of the finances.

DJ: How did everyone handle paying for the wedding?

Whitney Maxson:We definitely had a budget and worked through it. When you think about it, planning your wedding is often your first major expense as a newly married couple and how you handle it can set the tone for how you and your spouse make financial decisions throughout your marriage.

DJ:That’s very true. You certainly don’t want to over-spend and begin your marriage with a huge wedding-day debt.

KP:My wife and I paid for half of our wedding and our parents helped with the rest. My wife knew how to shop for the best deals. She did lots of research and soon learned that a lot of times, the prices you see quoted for things are definitely negotiable.

DJ:OK, so now everyone’s married and working and earning income. Do you believe it’s important for newly wedded couples to have a financial plan, and if so, where do you start with the planning?

KP:My wife and I look at both of our jobs and earnings as a whole unit, rather than individually, in terms of what’s available to us in terms of health and life insurance, employer retirement plans and college savings plans. For example, perhaps the lower earning spouse has a better 401k match while the higher earning spouse has no match. By looking at the plans collectively, you’ll want to maximize the better 401k plan and perhaps not even participate in an inferior employer plan while using an alternative savings vehicle like a Roth IRA.

We don’t have any children yet, but at some point we’ll want to actively save funds through 529 plans and other college savings platforms. But for right now, retirement plans and 401k plans are the most important for us because our belief is we want to sock away as much money as possible right now, while we’re young, and able to do so. The compounding effect of our savings will benefit us substantially down the road.

DJ: When would you advise a couple to seek out a financial planning professional for advice?

KP:I believe big life events drive this decision. It could be when you initially get engaged, married, start a family, accept a highly compensated job offer or maybe you’ve just received a promotion at work. Any time something happens in your life where you need advice regarding your money – that’s when you need to find a trusted financial planning professional.

DJ:What do you see happening to a couple’s finances when they start having children?

KP:All sorts of issues pop up at once… childcare and the use of employer-provided dependent care savings plans, as well as how to start saving for college. And something very important I’ve learned is don’t sacrifice your retirement savings for any of these things. You can always take out a loan for your kids’ college plans, but you cannot take out a loan for your retirement years. Also, with children it’s even more critical to have the appropriate life insurance. We believe in a base amount of level term insurance for both spouses, outside of any employer provided life insurance, to ensure your children and surviving spouse are financially supported at least until all of the children are off to college. At the same time you are considering life insurance, make sure your disability coverage is adequate, not simply that you have some sort of employer-provided coverage, as your future income is your most valuable asset and must be protected appropriately.

DJ:Do you see a need for a budget?

KP:Absolutely! When you first start out in your marriage, your income is low, so you want to try and avoid incurring debt, as much as possible, or get out of any debt you might have from student loans, credit cards, etc. My wife and I track everything we spend and make sure our spending is less than what we earn. When we track the expenses, it’s easy for us to analyze and see where we might be over-spending and what we can cut back on.

DJ: That sounds like a very solid approach, Kurtis. So, it appears there’s two kinds of debt newly married couples may face: either wedding-related expenses/credit card debt and/or student loan debt. Do you have any thoughts on where the focus should be for attacking these debt forms and how to pay them down quickly?

KP:I believe there are two routes to attack these debt forms. From a pure financial perspective, try and pay down the highest interest rate first. There’s also a theory where you can pay down the smallest balance first, just to get rid of some of your debt and then use the money you were spending to pay down those small balances on your higher debt balances. A lot of people feel if they pay off a lot of smaller bills, and then just have one or two larger balances to focus on paying off, they believe they are making headway very quickly. It’s a great motivator to keep saving and paying off your debt. I’ve seen success with both of these strategies.

DJ:I agree. The higher debt balances, especially with student loans, can be daunting, so if you can pay off the smaller ones, you’ll feel like you’re making great progress within your financial planning efforts.

WM:I agree as well, but you want to be sure you’re disciplined enough to actually take the available cash flow freed up by paying off those smaller debts and indeed apply it to those higher debt balances.

Let’s step back for a moment to talk about student loan debt, often the largest debt of young professionals. When I graduated from law school, I had an enormous amount of student loan debt. I consolidated all of my loans together with one rate and payment schedule. I did this when the interest rates were very low. My husband also had sizable student loan debt and we debated consolidating into one large loan. But, and here’s my note of caution, had we done that, we would have both been liable for the entirety of the debt. We decided to keep our loans separate, so that if one of us died, the survivor would not be responsible for the entire consolidated debt of both spouses’ loans.

DJ: That’s a valuable insight. Sounds like newly married couples not only need to determine a financial planning strategy, but also meet with an attorney to discuss estate planning.

WM:You’re absolutely correct. People often think you only discuss estate planning if you are very wealthy, perhaps necessitating wills and trusts. However, that is just one part of estate planning. Estate planning also involves developing financial powers of attorney, healthcare powers of attorney and living wills, documents every person over 18 should have, regardless of income or assets. Many state governments have developed rules that dictate who can make your personal decisions in times of emergency or incapacity. Often those default rules are consistent with what you desire, but sometimes they are not. Why would you want to take that chance? A living will, for example, is vitally important, if you desire to refuse life sustaining treatment in catastrophic circumstances. Right after my husband and I married, we were at the dinner table with my family and the discussion turned to what had happened to Terri Schiavo. I quickly realized that while my husband was aware (and was supportive of my wishes), my family was not. They would have kept me alive on a ventilator forever. I needed a living will, and fast, or risk a battle between my new husband and my parents. As discussed earlier in the context of student loan consolidation, estate planning can also involve asset protection. Consider the situation where one spouse may be in a high-risk profession, say a surgeon, while the other is in a low-risk profession, say a teacher. You may want to consider titling assets in the name of the teacher in this instance. It’s important to discuss and implement strategies to protect your assets, both during your lifetime and at your death.

DJ:How important is it to have these documents established during the engagement period?

WM:It is important to have these documents in place as soon as you determine that your fiancé or spouse is the one you wish to bear these responsibilities and make these decisions for you. I am not aware of any state that gives a would-bespouse any powers by default. Depending on the circumstances, it may make sense to have these basic documents implemented during the engagement period.

DJ:From a financial standpoint, I would caution that engaged couples don’t get too far ahead of themselves. Make sure you do get married before you turn over your entire financial well-being and power-of-attorney to someone you might not end up marrying in the end. Does it make sense for newly married couples to meet with an attorney who specializes in these subjects for an initial discussion of these matters?

WM:Most definitely. Estate planning attorneys will advise their newly married clients on how to best protect their assets, designate beneficiaries, develop wills, potentially set up trusts and create the other documents needed to protect their young families and property moving forward. The law in this area differs from state to state, so what might be applicable in Kentucky is different from Ohio, which is different from Indiana, etc. It’s best to meet with an attorney who is well versed in estate planning in your state of residency, to get the best advice for your particular situation. While certain online legal service websites can provide documents, they cannot provide the customized advice that many couples need.

DJ: Let’s talk about taxes and newly married couples. I am often asked, how long do you have to be married before you can file a joint tax return?

LR:That’s a great question. As long as you are married by December 31st, you can file jointly for that year. When you are first married, if you don’t have a lot of income to begin with, filing jointly with your spouse is typically advantageous. In certain circumstances, filing separately may be more beneficial; for example, if one spouse has significant deductions. Also, states may allow you file separately even though you file jointly with the federal return. This is where talking to a tax preparation professional will benefit you because they can make an analysis based solely on your situation. While some tax preparation software does the analysis for you, it cannot provide the customized tax advice many couples need.

DJ:When should a couple consider beginning a relationship with a CPA?

LR:Similar to what Kurtis mentioned about “life events,” probably in the first year of their marriage is a great time to get the right advice and get off on the right track tax-wise with your marriage. If you’re not finance savvy, you may not know what’s available to save you money or may not have the best tax-saving and planning strategies developed for your personal situation. For instance, many couples get married and are unsure if they should change their withholding status with their employer. It’s really a personal preference. For example, folks can keep their status/exemptions as is to give them a little cushion within their tax withholdings. It’s always better to be a bit more conservative in the beginning and avoid a big tax bill surprise on April 15th. This is just one of the tax planning strategies they can discuss with their CPA.

DJ: What are some tax-saving strategies available for new parents?

LR:There are all sorts of credits to consider including child tax credits. However, many credits are based on income level. There are dependent care credits for those not able to participate in an employer-sponsored dependent care flexible spending account. Here’s another time to consider adjusting their tax withholding status. Extra exemptions give you a little more cash flow in your paycheck, but perhaps that’s a good opportunity to increase your 401k contribution.

Additionally, many states offer tax incentives for 529 college savings plan contributions. These are all strategies a CPA and a financial planner can help newlyweds and new parents figure out as part of their financial planning process.

DJ: Talking about kids makes me want to circle back to the estate planning subject we touched on earlier.

WM:That’s the number one reason people come in my door – when they start having children. The biggest issue for any family is designating who will serve as guardian of minor children. If you do not have a will in place, the probate court will designate a guardian for your children. This is heartbreaking because competing parties (family, friends, etc.) will all end up in court at a very difficult time for everyone involved, trying to gain control over surviving children. This is a time when all adults involved should envelop the child and protect them with the best care possible, as opposed to jockeying for position over guardianship of the children. It’s easy to avoid all of this – meet with an attorney, make a decision on guardianship, and then document it. Guardianship is established through wills.

DJ:Do you see a lot of prenuptial agreements with newly married couples?

WM:We often see these agreements at the insistence of the young couple’s parents, who are concerned about the disposition of their own assets at the death of their child or in the event of their child’s divorce. You may be able to do appropriate trust planning from the top down and avoid the need for a prenuptial agreement. The other thing to consider is that while inherited property is considered separate property, problems arise when those assets become co-mingled with other marital assets. It’s much better if trusts are established and inherited assets are kept separate.

DJ: We’ve covered a lot of topics… so I want to ask each of you… in looking back, is there anything you would do differently?

KP:I would re-think our house purchase. We bought our home right before we got married. We were sold on the idea that it’s a house we’ll never have to move out of once we start a family, but it’s really just too much house and not an ideal location for our current lifestyle. Looking back, I would have liked to purchase a smaller home and one that’s closer to the city and my job.

DJ: That’s a great point Kurtis. I try to counsel my newly married clients that the first house is not your “end all be all” house. Your attitude and lifestyle completely change when kids arrive as schools become a significant decision point. Be flexible with that first house. Don’t overbuy and make sure the location is solid for resale value.

WM:Our first home was outside of the city. We bought it at the height of the market and were there for five years when we decided we wanted a location change. We took a big hit on the sale when it came time to move. Perhaps we should have waited to buy until we were more familiar with the area and confident in our long term plans.

LR: We’re still in the honeymoon stage and don’t have any problems.

DJ:Well, thank you, everyone, for sharing your insights on tackling one of the toughest subjects in a marriage… money. I think we all agree that proper planning, open lines of communication between spouses as well as seeking advice from professionals will help make the marriage last.ϖ

John D. Dovich & Associates is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person.